Siberian Ski Company recently expanded its manufacturing capacity, which will al

Question

Siberian Ski Company recently expanded its manufacturing capacity, which will allow it to produce up to 15,000 pairs of cross-country skis of the mountaineering model or the touring model. The Sales Department assures management that it can sell between 9,000 pairs and 13,000 pairs of either product this year. Because the models are very similar, Siberian Ski will produce only one of the two models.

Per Unit (Pair) Data

                               Mountaineering            Touring

Selling price             $88.00                         $80.00

Variable costs           52.80                           52.80

Fixed costs will total $369,600 if the mountaineering model is produced but will be only $316,800 if the touring model is produced. Siberian Ski is subject to a 40% income tax rate.

Required

A. If Siberian Ski Company desires an after-tax net income of $24,000, how many pairs of touring model skis will the company have to sell?

B. suppose that siberian ski Co. decided to produce only one model of ski. what is the total sale revenue at which siberian ski Co. would make the same profit or loss regardless of the ski model it decided to produce?

C. If the same Ski co. sale dept could guarantee the annual sale of 12,000 pairs of either model, which model would the company produce and why?

Explanation / Answer

Siberian Ski Company recently expanded its manufacturing capacity, which will allow it to produce up to 15,000 pairs of cross-country skis of the mountaineering model or the touring model. The Sales Department assures management that it can sell between 9,000 pairs and 13,000 pairs of either product this year. Because the models are very similar, Siberian Ski will produce only one of the two models.

Per Unit (Pair) Data

                               Mountaineering            Touring

Selling price             $88.00                         $80.00

Variable costs           52.80                           52.80

Fixed costs will total $369,600 if the mountaineering model is produced but will be only $316,800 if the touring model is produced. Siberian Ski is subject to a 40% income tax rate.

Required

A. If Siberian Ski Company desires an after-tax net income of $24,000, how many pairs of touring model skis will the company have to sell?

after-tax net income =( Units*(selling price- variable cost) - fixed cost)*(1-tax)

24,000 = (Units*(80-52.8) -$316,800)*(1-40%)

Units of touring ski= 13117.65 or 13118 approximately

B. suppose that siberian ski Co. decided to produce only one model of ski. what is the total sale revenue at which siberian ski Co. would make the same profit or loss regardless of the ski model it decided to produce?

Let total sale revenue = R

Profit from  Mountaineering ski = R*(88-52.8)/88- 369,600

Profit from  touring ski = R*(80-52.8)/88- 316800

R*(88-52.8)/88- 369,600 =R*(80-52.8)/80- 316800

Sales Revenue,R = $880,000

C. If the same Ski co. sale dept could guarantee the annual sale of 12,000 pairs of either model, which model would the company produce and why?

Profit from touring = (12000*(80-52.8) -$316,800)*(1-40%)= 5760

Profit from Mountaineering = (12000*(88-52.8) - 369,600)*(1-40%)= 31680

the company produce Mountaineering because profits are higher

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